Transcript of an Interview on Outlook for the Eastern Caribbean Region, with Murilo Portugal, Deputy Managing Director, IMF

February 7, 2008

This interview was conducted by Mr. Michael Christie, Reuters Bureau Chief for Southeastern U.S. and the Caribbean.

With Murilo Portugal, Deputy Managing Director
International Monetary Fund
Washington DC, February 7, 2008

MR. CHRISTIE: What do you hope to achieve or what are you in particular looking to hear when you travel [on February 8-12] to the Eastern Caribbean?

MR. PORTUGAL: I am going there to address the Finance Ministers of the ECCU [Eastern Caribbean Currency Union] region. This visit I am making to the region is part of our efforts here are the Fund to give greater parameters to regional surveillance. This is a region composed of a number of small island states that share a number of similar characteristics and similar problems, so my objective is to listen to them, [and] to discuss the international situation and how that situation could affect the region.

MR. CHRISTIE: How do you see that [international situation] potentially affecting the smaller states in the Caribbean?

MR. PORTUGAL: I think the effect on them would be more on the real side rather than on the financial side, because their financial systems are not so much interlinked with the international financial system. The [Caribbean financial systems] have more of a regional nature. But of course, a slowing down in the US economy could have an impact, for instance, on tourism. And tourism accounts for three-fifths of the exports of the ECCU countries, which, as I said, are small, open island economies, but dominated by tourism. So of course, they are vulnerable not only to weather shocks and to natural disasters but to important changes in the international economy that could affect tourism, for instance.

MR. CHRISTIE: I know we want to talk mainly about the Caribbean and your trip there, but what is your view of the potential impact of the slowdown on countries in the region?

MR. PORTUGAL: Of course the slowing down of the global economy is going to affect everyone. It's going to affect perhaps more the Latin American region, and within Latin America those countries that have the greatest linkages with the US. That said, a number of these countries are now in a much better position to withstand this turbulence than they have been past periods because of the improvements that they have achieved in their macroeconomic situation and in their performance, so they are more resilient than they were in previous episodes.

With respect to the Eastern Caribbean region, it has benefited in the last two or three years from this record global expansion, and most of the countries have enjoyed very high growth rates, that they had not seen in almost a decade. That was [also] driven by local factors—for instance, the World Cricket Cup that they hosted, which boosted construction spending and also boosted tourism. But now we are facing the prospect of some slowdown. Just to give you some figures: the ECCU region grew in 2006 by 5.9 percent and in 2007 by 4.1 percent. And we are projecting for 2008 an average growth for the ECCU region of 3.3 percent.

In addition to tourism, the other factor by which they can be affected is through foreign direct investment flows, which are important in the region, and they received a lot of these flows, especially in the construction industry. Of course, many of these economies have significant current account deficits, which are financed partly by these flows.

MR. CHRISTIE: What do you think these small countries should be doing right now to prepare for the next two years of potential US recession, whether short lived or not? What should they be doing, and what will you recommend to them?

MR. PORTUGAL: In fact they have, like many other developing countries, already started a process of fiscal consolidation—broadening their tax base, introducing value-added taxes, and trying to improve the overall fiscal situation. So, they have to do more along this line, because the levels of debt are still high. If you compare internationally, the average level of public debt in the region is 102 percent of GDP at the end of last year, which is really a quite high figure. So, they need to do more. All these economies share a quasi currency board arrangement, so they have a common exchange rate which is maintained at a fixed relation with the US, which means that the main instruments that they have are fiscal policy and structural policies. So, they need to continue with the fiscal process that they have started and also to speed up and to deepen the process of regional integration. But of course, in a way, this financial turmoil has positive and negative aspects. One aspect is that because the EC dollar is linked to the US dollar, it's also depreciating in real terms, and that is boosting the competitiveness of their exports, and they can still be quite competitive in relation to Europe and in relation to other areas in the world.

MR. CHRISTIE: Do you think that tourism is enough to carry them forward, especially since other commodities like bananas and sugar have fallen by the [wayside]?

MR. PORTUGAL: Certainly it corresponds to a natural comparative advantage that the islands have, and that's the area they are exploiting. This is the kind of transition that we are envisaging for the region—from an agricultural-based economy, based on bananas, sugar and other staples—to move into tourism. But there are other activities, such as financial services. There are certain countries in the region which are already exploiting that so they could also try to export financial services to other regions. They have good levels of education and health, so they can also try to export and to enter into other areas where human resources of good quality are important.

MR. CHRISTIE: How serious does the IMF think is the current challenge of food price inflation and energy costs to these small countries, and within that context, what is your view of Venezuela's Petrocaribe initiative? Is it helping the Caribbean to overcome this period of elevated energy prices?

MR. PORTUGAL: The problem of high energy costs and of high food costs is a real and serious one, and this has created inflationary pressures not only in the Eastern Caribbean region but in a number of other countries. It is particularly important in developing countries where food is an important component of the consumption basket. But we hope that, at least with respect to food, that this will be a temporary shock, because you have a supply response that takes a while to materialize, but which eventually materializes. And of course with respect to Petrocaribe, I think that whenever you have the scope of concessional financing for this region, we have to welcome that. So, I think it's a positive initiative. It has been more on the slow start so far, and hasn't yet made a significant contribution to the region, but I see it as a positive development. It would depend of course on how these resources are used.

MR. CHRISTIE: You mentioned before that one of the challenges these small countries face is natural disasters, weather-related in particular. Have you been observing the functioning of the catastrophe insurance fund set up by the World Bank? It looks like it is going to make its first payout for the Martinique earthquake to St. Lucia. Do you think that this mechanism is of any benefit to the region?

MR. PORTUGAL: It certainly is of benefit. I know that there is some disappointment in the region because in one quite significant weather event the wind speed was not enough to trigger the mechanism into function, but as you said yourself in this other case it seems that it's going to be used, so I think it's an important initiative. Of course, they have themselves to have some more contingency planning and some more preparedness for these type of events, and of course to build in margins that they can use as buffers when these types of risks materialize.

MR. CHRISTIE: Do you think, given that it didn't pay out to the Dominican Republic for the tropical storm, that it needs to be amended?

MR. PORTUGAL: I think this is already being considered by the World Bank, and of course we welcome very much this possibility. But I think the idea in itself is a good idea. It's a new idea, and we are experimenting with it. In the event, it didn't perhaps match entirely people's expectations, but the World Bank has indicated a willingness to consider the issue again. So I think that we are moving in the right direction.

MR. CHRISTIE: It's one of those little pieces of the puzzle to help the region.


MR. CHRISTIE: The EPA [Economic Partnership Agreement] struck with the European Union at the end of last year—do you see it creating any vulnerabilities in the region, given that there isn't really any sort of excess of exports at the moment apart from tourism and perhaps from financial services that the Caribbean has to offer, or have you looked at the EPA in closer detail and decided that this is quite beneficial?

MR. PORTUGAL: These partnership agreements with Europe are important. As you know, the region depended quite heavily on subsidized exports of sugar and bananas to Europe, and these have been eliminated, so it's important that they receive some form of compensation. Direct aid ... has been promised in many occasions, but perhaps the disbursement of these funds has not been as originally envisaged by these islands, and I think it would be important to speed up that. But this is a kind of a temporary type of initiative to help in the transition. The EPA—the partnership agreement-- is a more structural response rather than a conjunctural response to this transition, and I think it can open up a new area for exports of services by the Caribbean regions, especially financial services, as I was mentioning before. And if that materializes and that really becomes a reality, it would be an overall gain compared to the previous situation, because of course exports of financial services are much more stable than exports of bananas to Europe.

MR. CHRISTIE: I wanted to conclude by asking you about two specific countries [in the neighboring region]. The first one is the Dominican Republic. What is your view as to the possibility of renewing an IMF agreement? Would the Fund be open to that?

MR. PORTUGAL: I think it's a little bit premature to discuss that, because we have just finished an agreement with them. It was an important agreement, which helped the country when it was in the midst of the financial crisis and turmoil that they had in 2003, and thanks to the policies that the government put in place and to the help that the IMF gave, the country could come back in terms of quite significant rates of growth and controlled inflation and substantial improvements, especially in the financial sector and financial regulation. There are still many things to be done. There are still many challenges for the future. And I think the authorities know that. Whether they are going to request another program with the Fund is up to them to decide. As you know, they are in the middle of an electoral process now with Presidential elections. Probably they would need to wait for that phase to elapse, and to see what the results are and then for the new administration to take that decision. Of course, if they take that decision, the Fund is always here to help members and to discuss with members what their interests are, and that's the way we are going to look into this issue as any other similar issue that might arise with respect to other countries.

MR. CHRISTIE: What is your view of the progress made in Haiti? Things appear to be very slow but strangely stable for quite a long time. And as a journalist I notice, because we're always writing about bloodshed and chaos, and when things go quiet in Haiti we don't pay too much attention.

MR. PORTUGAL: You just summarized what I was going to say, because prior to being in this position that I am now, I was an Executive Director here at the Fund, and I represented Haiti as part of the Brazilian constituency. Maybe it looks to you now that it is slow moving, but compared to the period which I experienced and the period during which I had the greater contact with them, it's a big improvement, because they have managed, as you say, to achieve some political stability and some security stability, and that has opened the possibility of addressing macroeconomic issues and addressing growth issues, and with that they [have] started to receive back flows of aid and support from other countries. So I am positive about the developments in Haiti, taking this longer perspective. In many countries—and I would say maybe in all countries—progress is always slower than we would like. But I think in the case of Haiti, a lot of progress has been made, and the country is certainly moving in the right direction.

MR. CHRISTIE: I finished going through the issues that I wanted to raise with you. Are there any issues that I haven't addressed, particularly with the Eastern Caribbean, that I should be aware of or that you would like to comment on?

MR. PORTUGAL: No, I think that you did a very thorough and a very complete interview, so I don't have any additional points to mention.

MR. CHRISTIE: I hope you have a very good trip. And thank you, Sofia, for arranging this interview.

MR. PORTUGAL: Thank you very much.


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